8 Jul 2016
Markets
- Equity markets globally largely finished flat this week, whilst European and Japanese markets fell.
- The fallout from the BREXIT vote is still being considered by European and UK investors, following weekend rallies in the UK by pro-European supporters protesting against the decision.
- Indirect impacts from the fallout have begun with three London asset managers suspending trading in very large direct property funds after investors headed for the exit doors on reports London property values may fall by more than 20%.
- ‘Italian banking crisis’ filled world headlines this week, with most of the banks in Italy carrying a considerable amount of non-performing loans (circa $300-400bn). PM Renzi was somehow able to engineer somewhat of government guarantee even though it’s in direct violation of EU rules. Either he’s a very good PM or the EU caved in light of current conditions.
- In local stock news, Tabcorp shares were adversely affected by the NSW government’s surprise ban on greyhound racing. Qld and Vic have indicated they won’t follow suit, but are watching the space closely. The impact is a 5% hit to its total wagering turnover, which the company expects to make up through other substitutes.
- The big 4 banks received a boost after the banking regulator (APRA) noted they had met global banking capital requirements. The banks still need to raise more capital to meet the new rules, but this is now expected to be a lot less than previous estimates.
- The Aussie dollar pushed higher against the US dollar as expectations are increasing that the US central bank will struggle to raise interest rates this year.
Economics<
- The RBA maintained the 1.75% cash rate setting, with little change in comments from their decision in June. They remain ready and willing to lower rates further if needed. Markets are still pricing in 1-2 rate cuts by the end of the year.
- Australian retail sales rose 3.4% on the same time last year, with key growth coming from hardware, pharmaceuticals and recreational goods. Supermarkets, electronics, furniture and apparel all showed slowing trends, whilst department store sales held up reasonably well.
- Credit rating agencies reaffirmed Australia’s AAA rating, but moved their outlook to negative in light of results of the federal election. This could result in credit downgrades to the banks, which would increase their funding costs, most of which would be passed on to customers.
- Residential building approvals dropped back by a sharper than expected 5.2% in May, albeit to a still booming level of 231,000, which followed an upwardly revised rise in April to 244,000. The property market remains healthy for now.
- The US private sector added 172,000 jobs in June, well above economist expectations. This allays some concerns given how low the May payroll number was.
- The central bank of England lowered regulatory capital buffers for the banks by $13bn, with the move being the first policy easing since the BREXIT vote. More easing will follow, with lower rates and more QE expected in order to stave off a recession.
- Concerns regarding China’s mounting bad debt and credit defaults won’t go away with expectations increasing that a government funded recapitalisation will take place within two years costing more than $500bn. Most of the debt sits with state owned (or controlled) enterprises and the government has more than $3 trillion in reserves.
- Data relating to the output of the services sector in China surprised on the up, reaching an 11 month high. The rotation from the old to new economy is well and truly underway.
Politics
- The Australian Federal Election result is yet to be finalised with the Coalition closest to gaining an absolute majority as counting continues. Even if absolute majority is not achieved, they look likely to remain in power with the support of members of other parties. The Senate looks less clear at this point, which is likely to result in more uncertainty over the next three years.
- It looks like Spanish voters will have to head back to the voting booths for the third time in 12 months after the election result showed no clear majority, with the leading party unable to form government. Importantly, the populist vote surprisingly fell, potentially impacted by the fallout from BREXIT.
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